Standing to Invoke PSAs as a Foreclosure Defense

posted by Adam Levitin

A major issue arising in foreclosure defense cases is the homeowner's ability to challenge the foreclosing party's standing based on noncompliance with securitization documentation. Several courts have held that there is no standing to challenge standing on this basis, most recently the 1st Circuit BAP in Correia v. Deutsche Bank Nat'l Trust Company. (See Abigail Caplovitz Field's cogent critique of that ruling here.) The basis for these courts' rulings is that the homeowner isn't a party to the PSA, so the homeowner has no standing to raise noncompliance with the PSA.

I think that view is plain wrong. It fails to understand what PSA-based foreclosure defenses are about and to recognize a pair of real and cognizable Article III interests of homeowners: the right to be protected against duplicative claims and the right to litigate against the real party in interest because of settlement incentives and abilities.

The homeowner is obviously not party to the securitization contracts like the PSA (query, though whether securitization gives rises to a tortious interference with the mortgage contract claim because of PSA modification limitations...). This means that the homeowner can't enforce the terms of the PSA. The homeowner can't prosecute putbacks and the like. But there's a major difference between claiming that sort of right under a PSA and pointing to noncompliance with the PSA as evidence that the foreclosing party doesn't have standing (and after Ibanez, it's just incomprehensible to me how this sort of decision could be coming out of the 1st Circuit BAP with a MA mortgage).

Let me put it another way. Homeowners are not complaining about breaches of the PSA for the purposes of enforcing the PSA contract. They are pointing to breaches of the PSA as evidence that the loan was not transferred to the securitization trust. The PSA is being invoked because it is the document that purports to transfer the mortgage to the trust. Adherence to the PSA determines whether there was a transfer effected or not because under NY trust law (which governs most PSAs), a transfer not in compliance with a trust's documents is void. And if there isn't a valid transfer, there's no standing. This is simply a factual question--does the trust own the loan or not? (Or in UCC terms, is the trust a "party entitled to enforce the note"--query whether enforcement rights in the note also mean enforcement rights in the mortgage...) If not, then it lacks standing to foreclosure.

It's important to understand that this is not an attempt to invoke investors' rights under a PSA. One can see this by considering the other PSA violations that homeowners are not invoking because they have no bearing whatsoever on the validyt of the transfer, and thus on standing. For example, if a servicer has been violating servicing standards under the PSA, that's not a foreclosure defense, although it's a breach of contract with the trust (and thus the MBS investors). If the trust doesn't own the loan because the transfer was never properly done, however, that's a very different thing than trying to invoke rights under the PSA.

I would have thought it rather obvious that a homeowner could argue that the foreclosing party isn't the mortgagee and that the lack of a proper transfer of the mortgage to the foreclosing party would be evidence of that point. But some courts aren't understanding this critical distinction.

Even if courts don't buy this distinction, there are at least two good theories under which a homeowner should have the ability to challenge the foreclosing party's standing. Both of these theories point to a cognizable interest of the homeowner that is being harmed, and thus Article III standing.

First, there is the possibility of duplicative claims. This is unlikely, although with the presence of warehouse fraud (Taylor Bean and Colonial Bank, eg), it can hardly be discounted as an impossibility. The same mortgage loan might have been sold multiple times by the same lender as part of a warehouse fraud. That could conceivably result in multiple claimants. The homeowner should only have to pay once. Similarly, if the loan wasn't properly securitized, then the depositor or seller could claim the loan as it's property. Again, potentially multiple claimants, but the homeowner should only have to pay one satisfaction.

Consider a case in which Bank A securitized a bunch of loans, but did not do the transfers properly. Bank A ends up in FDIC receivership. FDIC could claim those loans as property of Bank A, leaving the securitization trust with an unsecured claim for a refund of the money it paid Bank A. Indeed, I'd urge Harvey Miller to be looking at this as a way to claw back a lot of money into the Lehman estate.

Second, the homeowner had a real interest in dealing with the right plaintiff because different plaintiffs have different incentives and ability to settle. We'd rather see negotiated outcomes than foreclosures, but servicers and trustees have very different incentives and ability to settle than banks that hold loans in portfolio. PSA terms, liquidity, capital requirements, credit risk exposure, and compensation differ between services/trustees and portfolio lenders. If the loans weren't properly transferred via the securitization, then they are still held in portfolio by someone. This means homeowners have a strong interest in litigating against the real party in interest.

I'm not enough of a procedure jock to know if there's a way for a homeowner to force an interpleader among the potential claimants-trust, depositor, seller, etc, but that seems like the right way to handle this. In any event, I think the fact that the homeowner isn't a party to the securitization is kind of beside the point. The homeowner should be able to challenge standing because the homeowner has real legal interests at stake in litigating against the right party.

Well... The Correia AoM was signed by Erica Johnson Seck as VP of MERS so that, in and of itself, SHOULD have been red flag #1.

Flag #2 should have been MERS. R.K. and Hultman both admitted in deposition that MERS never holds title or interest in notes. The case law is simply too long at this point to list but Ibanez is a great start.

Flag #3 should have been that, according to both the Prospectus and PSA for the INABS 2005-A Trust, the closing and cut-off dates were March 2005. "Big deal" you say. Turns out that it at least SHOULD be b/c p. 25 of the Prospectus holds this clause:
"Rather than repurchase the mortgage loan as provided above, the seller may remove the mortgage loan (a deleted mortgage loan)from the trust fund and substitute in its place another mortgage loan (a replacement mortgage loan); **however, substitution is permitted only within two years of the closing date and may not be made unless an opinion of counsel is provided to the trustee to the effect that substitution will not disqualify the trust fund as a REMIC or result in a prohibited transaction tax under the Code."***

Cut-off Date: March 1, 2005
Closing Date: On or about March 11, 2005

Correia assignment into the INABS 2005-A Trust: August 3, 2007

Regardless of whether a borrower has standing to enforce any terms of a PSA, according to this PSA, the trust never legally owned the Correia Note and therefore never had standing to foreclose.

Whether Attorney Baker, as a graduate of Attorney Max Gardner's Bootcamp, sufficiently made these arguments, I don't know.

Even IF MERS had title and interest in the promissory note, MERS could not assign the Correia Note directly into the INABS 2005-A Trust. It would have had to pass through IndyMac ABS, Inc. as Depositor. The Mortgage Loan Purchase Agreement for the Correia Note memorializing this should have been made to be produced through discovery for examination.

Then, of course, there is the examination of the MERS Milestone Report for the Correia note to see where it has been through the years which should have also been produced through discovery...

Yes, the borrower has a vested interest in determining that the ONE AND ONLY entity entitled to to foreclose gets the property. This is especially true for those of us who live in full recourse states. It's as if I bought a car from my uncle under the condition that I pay him $500 per paycheck. If my employer stiffs me, I can't pay my uncle. In this analogy I am the securitizer, my uncle is the mortgage trust, and the employer is the delinquent borrower. The existence of a contract between my uncle and me has no bearing on the dispute between me and my employer. If my employer settles with my uncle that decreases my legal rights with my employer not one iota. Only if I have separately assigned my uncle to be my agent in my dispute with my employer does setting with him affect my ability to sue my employer. The fact that the PAYMENTS have been forwarded to the trust does NOT imply that the right to foreclose has been successfully transfered.

Four years into this and, in addition to the timely conveyance issues, we're still dealing with alphabet soup issues.

The assignment in this instance attempts to memorialize a transaction that never actually took place, and is a baldly fabricated piece of false evidence.

IndyMac, at the time of the alleged assignment, had no remaining right, title or interest to convey to DBNT. IndyMac, pursuant to the trust documents, was required to convey its interests to IndyMac ABS. Pursuant to the trust documents DBNT could acquire interests in the subject property (note and mortgage) ONLY from IndyMac ABS.

Mr. Dillon has pointed out this false piece of evidence was executed by Erica Johnson Seck. Documents executed by Ms. Seck should be accorded no respect or legal effect whatsoever.

I periodically read your posts and you keep dancing around two points.

First, there is no requirement that a party "own" a note to enforce the note. "Ownership" of the note is not a meaningful concept under Article 3. If the party suing has the right to enforce under Article 3, payment by the obligor discharges the obligation, period, regardless of who owns the note.

Second, Article 9203(g) is absolutely clear that the right to enforce the note carries with it the right to enforce all rights in the collateral for the note.

I'm well aware that the UCC doesn't use the ownership concept for note enforcement. That's why I noted parenthetically the "person entitled to enforce" bit. Ownership is colloquial.

As for mortgage follows the note under 9-203(g)' it ain't nearly so clear. Does the thief of a note--and hence a holder and a person entitled to enforce the note--become the mortgagee and able to foreclose? Does 9-203(g) apply to deeds of trust (which are sale and repurchases)? The language talks about security interests, but a repo isn't actually one. And it goes on. It also doesn't say anything about mortgage enforceability, only transfer.

There are two notes, an Article 9 note secured by an (Article 3 note secured by a real estate lien.) Security for a Mortgage Backed Security Certificate note created under Article 9 would attach and perfect under UCC Article 9 at the time the Article 9 note was created. As this creation of the securities note requires true sales of the underlying Article 3 note and it's security if which is real estate would be required to comply with local laws of jurisdiction. Before we know what right can be enforced regarding the Article 9 note's collateral, the legal standing of the Article 3 note collateral must be established. Where MERS is involved, this becomes a severe factor.

I want to start a new thread for the, "Return of Collateral," given as consideration for the alleged loan??
A Promissory Note is a Negotiable Instrument, like a check. Fifteen years prior, The banks historically, (before MERS & securitization), held our Note (I.O.U), our collateral,...in their vault for 30 years against our promise to pay and in the event we defaulted on our promise to pay, the Mortgage or Deed of Trust, (as a lien instrument), was engaged to collect on the promise to pay (our Note & collateral).
After the debt was extinguished, either by our paying-off the alleged loan or by foreclosure on the Note, (negotiation of the check),...the check (Note) was always returned to us as cancelled and all business concerning it, is complete.
No one could ever try to cash our check (by demanding payment of our Note/obligation), ever again.
Why is it that today we simply receive a, "Satisfaction of Mortgage," and not the return of our Note,...our check,...our actual valuable collateral?!? A satisfaction of mortgage is meaningless,...especially if we were paying the wrong entity. Every time the (cancelled) Note is not returned to us (grantor), opens us (all) up for duplicative claims for payment, because those other persons may actually be in possession of our, "Check as Bearer Paper?!?
Where are the court lawsuits demanding the return of our Notes? The notes have been destroyed,...I know, so where are the lawsuits??
Isn't a, "Replevin in Ditenent," the proper suit to bring?
Sincerely, Robert Sedlar*

Use of the term "ownership," even if colloquially, is misleading where the issue under discussion is confusion of whether the rights in the note belong to the originator or the assignee (e.g., the securitized trust). From the perspective of Article 3, the dispute between the two parties concerning "ownership" is irrelevant to the right to enforce and the discharge of the underlying obligor. If the party suing a holder or not? If so, there is no legal or policy reason the obligor should not pay.

With respect to 9203(g), the thief issue is a red herring, because the real issue there is one regarding the note and not the mortgage. And there is not a court in the country, at least any bankruptcy court, that is going to treat a deed of trust as anything other than a "security interest" within the meaning of the UCC or the Bankruptcy Code," and there is no legitimate policy to the contrary that I can think of.

A question re the Correia case. Under BACKGROUND,
p 2, 2nd paragraph, IndyMac tansferred the note
to Deutsche Bank, and MERS held the mortgage.
Isn't that bifurcation of the note and mortgage?

Same paragraph:
"Subsequently the Debtors' note and mortgage
were combined with others and deposited into a trust..."

Deutsche Bank was appoimted as Trustee, 2005.

P 3 "In August 2007, MERS assigned the Debtors'
mortgage to Deutsche Bank." How can that be if
the mortgage was combined with the note and deposited
into the trust in 2005?

The appellate court stated:
"The Debtors asked the BK court to declare the
mortgage assignment invalid based upon non-compliance
with the provisions of the PSA- a contract to which they
were not a party-..."

The Debtors did not challenge standing of Deutsche
Bank because of non-compliance with the provisions
of the PSA that would have negated
Deutsche Bank's standing. Instead, the Debtors argued
that the court should declare the mortgage
assignment invalid based upon non-compliance with
the provisions of the PSA. The court rightly stated
the Debtors were not a party with standing to
object to express provisions of the PSA

Regarding the point that transfers in violation of the PSA are void under New York trust law, what is your response to footnote #22 in In re Doble wherein the Southern District California Bankruptcy Court dismisses this argument stating:

"New York Estate Powers and Trusts Law is not relevant here. Under section 11–1.1(a), New York Estate Powers and Trusts Law explicitly excludes business trusts. The Trust here is registered with the SEC, and the PSA provides for the issuance of certificates and the election of REMIC status with the IRS. Trusts whose shares are traded on the American Stock Exchange and that qualify as “real estate investment trusts” under the Internal Revenue Code are considered business trusts. Prudent Real Estate Trust v. Johncamp Realty, Inc., 599 F.2d 1140, 1141 (C.A.N.Y.1979). As a business trust, New York's Estate Powers and Trusts Law does not govern Deutsche Bank's ownership of the Loan. Rather, the ownership issue is governed by law applicable to trusts generally. See, e.g., Fogelin v. Nordblom, 402 Mass. 218, 521 N.E.2d 1007, 1012 (Mass 1988); In re Great Northern Iron Ore Props., 263 N.W.2d 610 (Minn.1978)."

IN re Doble is just wrong. These are business trusts. The court confuses REITs (real estate investment trusts) with REMIC (real estate mortgage conduits). They are different entities.

REITs are actively managed real estate investment firms. REMICs are passive entities that do not conduct any business other than collecting payments on the loans they own. They cannot buy or sell assets in the ordinary course, unlike a REIT. The NY case cited in Doble cite is about a different type of entity. (But even if Doble were right, NY trust law generally requires as perfect a delivery as possible of trust property in order to mitigate concerns about fraudulent transfer. [It follows gift law in this regard.] Holding bearer paper is NOT as perfect a delivery as possible.)

What's more, securitization trusts are intentionally designed not to be business trusts. That is so that they will be bankruptcy remote. 11 USC 109 permits corporations to file for bankruptcy, and 11 USC 101 defines corporation to include a business trust (and by implication to exclude nonbusiness trusts). Take a look at In re Secured Equipment Trust of Eastern Air Lines, Inc.) 38 F.3d 86 (2d Cir. 1994), http://www.msba.org/sec_comm/sections/taxation/docs/materials3-11-10/EasternAirlines2.pdf. REITs, in contrast, have never been designed to be bankruptcy remote. That's not part of their attraction.

So simply put, the court just didn't know what it was talking about in In re Doble, but even if it were right, there'd still likely be a major trust law problem that should be grounds for contesting whether the trust has standing to foreclose.

In a Mortgage Fraud Seminar by the Texas Office of the Attorney General, June 15, 2009 entitled Securitization: The Big Picture, a reference to the Federal Register, Asset-Backed Securities; Final Rule says a Note is CONVERTED into a Securitized Instrument.

I take that meaning that you have an Apple and you convert it into Apple Juice. Once Juice there is no way to convert it back into an Apple.

If the Note has or claims to have been converted into Securitized Instrument (being a Certificate or a Bond)cannot fall under the UCC Code but forever under the Securitization Code.

How then can the Bank bring this Apple Juice into the court and tell the court that it is an Apple?

As to the Foreclosure, how can you foreclose on a Securitized Instrument and how do the County's allow a Credit Bid of a Securitized Instrument to purchase a property?

Better yet, once the bank has the property, what happens with the Note? Is it no now satisfied?

What if the party foreclosing shows up in court with the "blue ink" note (endorsed in blank) and mortgage, does it matter who the securitized trust is or whether the PSA was followed? It doesn's seem like any type of standing challenge is relevant to the homeowner/debtor at that point because under the UCC the person bearing the note in Court the actual "holder" of the note and would have the right to enforce the security instrument.

95% of all mortages today subject to the reps and warrants mandated under the GSE Business Model. A Model taged as "fatally flawed" by every major schlar on the subject.

The PSAs are but one of the problems in the gse model. Every other player in the model as it has evolved has similar problems which represent a breach in the R & Ws.

Is it conceivable that a Business Model proffered to congress with the guarantee of R & W's of its players/partners in exchage for the full backing of the us treasury would leve the taxpayers without any standing to challenge?

Even if you have the lender show up with a 'blue ink' promissory note the Fat Lady hasn't sung yet.

When you look at the procedure to extract a defaulted loan from the pool, you may see that if the loan has mortgage insurance, it is declared 'paid in full'. In other words, a third party interest has paid off the note, and there is no contract remaining. The court should just hand you your note, find for you, and say ... "next case".

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